ANDYou have to admire the staging of Elon Musk. On Monday, the founder of Tesla introduced a popular five-for-one stock split, turning the price of a $ 2,300 stock into a smaller number to make ownership “more accessible.” The economic effect of the change was precisely zero – investors just got four more shares for each – but Tesla shares still rose 12%.
Musk produced a twist on Tuesday. Since investors are clearly keen to pay Tesla money at almost any cost, the company will be issuing new shares to raise $ 5 billion for “general corporate purposes.” The explanation was gloriously vague, but instead of Tesla, you can afford to be a coward. With a stock valuation of $ 460 billion, the new shares represent minimal dilution for existing investors. It would be almost silly not to take advantage of it.
Even die-hard fans, however, must be wondering at this point if the stock is moving a little too fast. In the last three weeks alone, the price has jumped 50%. The only real news from this period was the announcement of the stock split, which, I repeat, is cosmetic. Tesla is a big company, but in the age of Robinhood day traders, pure psychology seems to control the valuation.
Old-fashioned rail franchising is dead. It is time to move on
Rail franchising was suspended in March “for a limited period, initially six months” and, to anyone’s surprise, six months was not enough. GWR, the FirstGroup operator which manages trains to and from London Paddington, has had its so-called “Emergency Measures Agreement” (EMA) extended until next June. Agreements on other routes are expected in the next fortnight.
Essentially, the EMAs transfer the revenue risk to the government and the operator collects a fixed fee for the management of the services. This version of nationalization is costly to the treasury when trains are underpopulated (£ 3.5bn and relying on the network since March) but had to be rushed through to keep the show on track.
It is, however, reasonable to expect the Department of Transportation to do more than simply revive today’s problems until next summer. With GWR a relatively stable franchise, an extended EMA is an understandable fudge. This will not be the case on the roads most affected by the crisis.
Even before the pandemic, fixed price contracts looked like the future of railroads – in other words, something akin to today’s emergency setup, but on a permanent basis and with local variations.
The challenge for the DfT is to manage the transition in a crisis situation. He cannot hand out prison release financial cards to franchises that were racking up losses under the old setup (FirstGroup has a couple in that position). It is right that some operators will have to give up the capital they had deposited in the form of a deposit.
This is the tricky part because the settlements will have to be negotiated and the operators are not totally powerless. But the DfT must step up the pace of reforms. Old-fashioned franchising is dead. It is time to move on.
Normalcy returns, but not enough publicity for ITV investors
ITV’s relegation from the FTSE 100 will be confirmed on Wednesday, but seems inevitable from the early days of the lockdown. Despite the broadcaster’s laudable efforts to diversify its earnings, the stock market is looking first at ad spend, where the going is ugly.
In the 2009 recession, the last time ITV was off the index, the worst monthly advertising hits were 20%. This time around, the negative numbers were 42%, 46% and 42% in April, May and June respectively. The 23% year-over-year decline in July represented some kind of recovery, but only from terrible to miserable.
A semblance of normalcy returns to the screen. Soaps are back. Britain’s Got Talent will appear in a socially distanced form. I’m A Celebrity… will be doing business from Wales, rather than Australia.
All of this is helpful, but not a catalyst for a rally in the share price that has more than halved since the pandemic. Investors want to see a vaguely “normal” figure for ad spending. The timing remains to be guessed.